[Federal Register Volume 69, Number 208 (Thursday, October 28, 2004)]
[Notices]
[Pages 62918-62920]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2873]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26642; File No. 812-13082]


American Family Life Insurance Company, et al.

October 21, 2004.
AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Notice of application for an order of approval pursuant to 
section 26(c) of the Investment Company Act of 1940, as amended (the 
``Act'').

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Applicants: American Family Life Insurance Company (the ``Company''), 
American Family Variable Account I (the ``Life Account''), and American 
Family Variable Account II (the ``Annuity Account'') (collectively, the 
``Applicants'').

Summary of Application: Applicants request an order approving the 
substitution of (1) Initial Class shares of the Fidelity VIP Mid Cap 
Portfolio (``Replacement Portfolio'') of the Fidelity Variable 
Insurance Products Fund III (``Fidelity Fund'') for Investor Class 
shares of Strong Mid Cap Growth Fund II (``Replaced Portfolio A'') of 
the Strong Variable Insurance Funds, Inc. (``Strong Fund'') and (2) 
Initial Class shares of the Replacement Portfolio for Investor Class 
shares of Strong Opportunity Fund II (``Replaced Portfolio B'') of 
Strong Opportunity Fund II, Inc. (``Strong Opportunity Fund'') 
currently held by the Life Account and the Annuity Account (each, an 
``Account,'' together, the ``Accounts'') to support variable life 
insurance or variable annuity contracts issued by the Company 
(collectively, the ``Contracts'').

Filing Dates: The application was filed on April 30, 2004, and amended 
and restated on August 25, 2004.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Secretary of the 
Commission and serving the Applicants with a copy of the request, 
personally or by mail. Hearing requests should be received by the 
Commission by 5:30 p.m. on November 17, 2004, and should be accompanied 
by proof of service on the Applicants, in the form of an affidavit or, 
for lawyers, a certificate of service. Hearing requests should state 
the nature of the writer's interest, the reason for the request, and 
the issues contested. Persons may request notification of a hearing by 
writing to the Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, c/o James F. 
Eldridge, Esq., American Family Life Insurance Company, 6000 American 
Parkway, Madison, Wisconsin 53783-0001, and Thomas E. Bisset, Esq., 
Sutherland Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW., 
Washington, DC 20004-2415.

FOR FURTHER INFORMATION CONTACT: Rebecca A. Marquigny, Senior Counsel, 
or Zandra Bailes, Branch Chief, Office of Insurance Products, Division 
of Investment Management, at (202) 942-0670.

SUPPLEMENTARY INFORMATION: The following is a summary of the amended 
and restated application. The complete amended and restated application 
is available for a fee from the Commission's Public Reference Branch, 
450 Fifth Street, NW., Washington, DC 20549-0102 (telephone 202-942-
8090).

Applicants' Representations

    1. The Company is a stock life insurance company organized under 
Wisconsin law in 1957. The Company conducts a conventional life 
insurance business and is authorized to transact the business of life 
insurance, including annuities, in seventeen states.
    2. Each of the Accounts is a segregated asset account of the 
Company, is a ``separate account'' as defined by Rule 0-1(e) under the 
Act, and is registered with the Commission as a unit investment trust. 
Income, gains and losses, realized or unrealized, from the assets of 
each Account are credited to or charged against that Account without 
regard to other income, gains or losses of the Company. Purchase 
payments made under the Contracts are allocated to one or more 
subaccounts of each Account.
    3. The Life Account currently is divided into 11 subaccounts, each 
of which invests exclusively in a specific investment portfolio of an 
underlying mutual fund. The assets of the Life Account support variable 
life insurance contracts issued by the Company, and interests in the 
Life Account offered through such Contracts have been registered under 
the Securities Act of 1933, as amended (the ``1933 Act'') on Form N-6 
(File No. 333-44956).
    4. The Annuity Account currently is divided into 11 subaccounts, 
each of which invests exclusively in a specific investment portfolio of 
an underlying mutual fund. The assets of the Annuity Account support 
variable annuity contracts issued by the Company, and interests in the 
Annuity Account offered through such contracts have been registered 
under the 1933 Act on Form N-4 (File No. 333-45592).
    5. The Contracts are flexible premium variable annuity and variable 
life insurance contracts. For as long as a variable life insurance 
Contract remains in force or a variable annuity Contract has not yet 
been annuitized, a Contract owner may transfer all or part of the 
Contract value from one subaccount to another subaccount or to a fixed 
account. The Company reserves the right to revoke or modify the 
transfer privilege at any time, and reserves the right to assess a 
charge for transfers in excess of 12 per transfer year.
    6. Each of the Contracts expressly reserves for the Company the 
right, subject to compliance with applicable law, to substitute shares 
of one underlying mutual fund or portfolio held by a subaccount of an 
Account for another. This right is disclosed in the prospectuses for 
the Contracts.
    7. The Company proposes to substitute Initial Class shares of the 
Replacement Portfolio for Investor Class shares of Replaced Portfolio A 
and Investor Class shares of Replaced Portfolio B held in the Accounts 
(the ``proposed substitutions''). The proposed substitutions are part 
of an effort by the Company to provide a portfolio selection within the 
Contracts that: (1) Better represents the designated asset classes; (2) 
provides more favorable name recognition; and (3) provides more 
competitive long-term returns relative to other funds in the asset 
class peer group.
    8. The Strong Fund is registered as an open-end management 
investment company under the Act (File No. 811-06553) and currently 
offers 3 separate investment portfolios, only one of which, Replaced 
Portfolio A, would be involved in the proposed substitution. The Strong 
Fund issues a separate series of shares of beneficial interest in 
connection with each portfolio and has registered such shares under the 
1933 Act on Form N-1A (File No. 33-45321). Strong Capital Management, 
Inc. (``Strong'') serves as the investment adviser to each portfolio.
    9. The investment objective of Replaced Portfolio A is capital 
growth through investment of at least 80% of its

[[Page 62919]]

net assets in stocks of medium-capitalization companies (substantially 
from the technology sector) that the Portfolio's managers believe have 
favorable prospects for growth of earnings and capital appreciation. 
The net operating expenses (i.e., after expense waivers and fee 
reimbursements) for the year ended December 31, 2003, was 1.18% 
(expressed as a percentage of average daily net assets). The average 
annual total return for the past three fiscal years for Replaced 
Portfolio A was: -30.8% (2001); -37.6% (2002); and 34.2% (2003).
    10. The Strong Opportunity Fund is registered as an open-end 
management investment company under the Act (File No. 811-06552) and 
currently offers one investment portfolio, Replaced Portfolio B. The 
Strong Opportunity Fund issues a series of shares of beneficial 
interest in connection with the portfolio and has registered such 
shares under the 1933 Act on Form N-1A (File No. 33-45320). Strong 
serves as investment adviser to the portfolio.
    11. The investment objective of Replaced Portfolio B is capital 
growth through investment primarily in stocks of medium-capitalization 
companies (defined as companies with market capitalization 
substantially similar to that of companies in the Russell Midcap Index) 
that the Portfolio's managers believe are underpriced yet have 
favorable prospects for growth of earnings. The net operating expenses 
(i.e., after expense waivers and fee reimbursements) for the year ended 
December 31, 2003, was 1.09% (expressed as a percentage of average 
daily net assets). The average annual total return for the past three 
fiscal years for Replaced Portfolio B was: -3.7% (2001); -26.8% (2002); 
and 37.0% (2003).
    12. The Fidelity VIP Fund is registered as an open-end management 
investment company under the Act (File No. 811-07205); the Replacement 
Fund is one of seven investment portfolios it currently offers. The 
Fidelity VIP Fund issues a series of shares of beneficial interest in 
connection with each portfolio and has registered such shares under the 
1933 Act on Form N-1A (File No. 33-54837). Each portfolio of the 
Fidelity VIP Fund has entered into an agreement with Fidelity 
Management & Research Company (``FMR'') under which FMR acts as 
investment adviser for the portfolio. Under each such investment 
advisory agreement, FMR has overall responsibility for the selection of 
investments in accordance with the investment objective, policies and 
limitations of the portfolio, and for handling the portfolio's business 
affairs. FMR Co., Inc. (``FMRC''), an investment adviser affiliate of 
FMR, has entered into a sub-advisory agreement with FMR under which 
FMRC acts as subadviser for each portfolio of the Fidelity VIP Fund, 
including the Replacement Portfolio. FMRC has daily responsibility for 
the management of the investment and reinvestment of the assets of the 
Replacement Portfolio.
    13. The investment objective of the Replacement Portfolio is long-
term growth of capital through investment of at least 80% of portfolio 
assets in securities of companies with medium market capitalization 
(defined as companies with market capitalization similar to that of 
companies in the Russell Midcap Index or the S&P MidCap 400). The net 
operating expenses (i.e., after expense waivers and fee reimbursements) 
for the year ended December 31, 2003, was 0.70% (expressed as a 
percentage of average daily net assets). The average annual total 
return for the past three fiscal years for the Replacement Portfolio 
was: -3.26% (2001); -9.82% (2002); and 38.64% (2003).
    14. Applicants assert that the Replacement Portfolio is an 
appropriate replacement for the Replaced Portfolios for each Contract. 
The investment objectives of the Replacement Portfolio are 
substantially identical to those of Replaced Portfolio A. Both pursue 
their investment objective by investing, under normal market 
conditions, at least 80% of their assets in medium capitalization 
companies that have favorable growth prospects. The investment adviser 
for Replaced Portfolio A and the investment adviser for the Replacement 
Portfolio also emphasize an active trading approach and rely on a 
fundamental analysis of each company in making an investment decision.
    15. The Replacement Portfolio's investment objective also is 
substantially similar to that of Replaced Portfolio B. Both pursue 
their investment objective by investing primarily in medium 
capitalization companies that have favorable growth prospects. The 
investment adviser for Replaced Portfolio B and the investment adviser 
for the Replacement Portfolio also rely on a fundamental analysis of 
each company before making an investment decision.
    16. Applicants represent that the Replacement Portfolio has 
available to it transactional advantages attributable to achieve 
economies of scale greater than those of each Replaced Portfolio and 
has a significantly lower expense ratio than either Replaced Portfolio 
even after expense waivers and reimbursements for the Replaced 
Portfolios have been taken into account.
    17. In the May 2004 prospectuses for the Accounts and the 
Contracts, the Company notified owners of the Contracts of its 
intention to take the necessary actions, including the order requested 
by the amended and restated application, to carry out the proposed 
substitutions. The current prospectus for the Replacement Fund and the 
current prospectuses for each of the other portfolios available as 
investment options available under the Contracts, were bound together 
with the May 1, 2004, prospectuses for the Contracts and the Accounts.

Applicants' Legal Analysis

    1. Section 26(c) of the Act requires the depositor of a registered 
unit investment trust holding the securities of a single issuer to 
receive Commission approval before substituting the securities held by 
the trust. The Commission will approve such a substitution if the 
evidence establishes that the substitution is consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act.
    2. The proposed substitutions appear to involve the substitution of 
securities within the meaning of Section 26(c) of the Act. Applicants 
therefore request an order from the Commission pursuant to Section 
26(c) approving the proposed substitutions.
    3. Applicants maintain that Contract owners will be better served 
by the proposed substitutions and that the proposed substitutions are 
appropriate given the Portfolios and other investment options available 
under the Contracts. In the last three years, the Replacement Portfolio 
has had investment performance superior to that of each Replaced 
Portfolio. The Replacement Portfolio has had substantially lower 
expenses over this same period than each Replaced Portfolio and 
substantially greater assets.
    4. Applicants assert that the Replacement Portfolio and Replaced 
Portfolio A are substantially the same in their stated investment 
objectives and principal investment strategies. Applicants represent 
that the Replacement Portfolio and Replaced Portfolio B are 
substantially similar in their stated investment objectives and 
principal investment strategies as to afford investors continuity of 
investment. Applicants also assert that there is similarity in the 
principal investment risks for each Replaced Portfolio and the 
Replacement Portfolio.

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    5. Applicants state that, although each Replaced Portfolio benefits 
from an expense reimbursement arrangement that reduces the Portfolio's 
expenses, even after the reimbursements for the Replaced Portfolios 
have been taken into account, the expenses of the Replacement Portfolio 
are still lower than those of each Replaced Portfolio. Also, there is 
no assurance that the expense reimbursement arrangements for the 
Replaced Portfolios will continue in the future. Moreover, for two 
years following the proposed substitution, Contract owners affected by 
the proposed substitution will benefit from a subaccount and underlying 
Portfolio with aggregate annualized expenses that can be no higher than 
the aggregate annualized expenses of Replaced Portfolio B and the 
subaccount invested in Replaced Portfolio B for the fiscal year ended 
December 31, 2003.
    6. Applicants assert that the proposed substitutions are not the 
type of substitution that Section 26(c) was designed to prevent. Unlike 
traditional unit investment trusts where a depositor could only 
substitute an investment security in a manner which permanently 
affected all the investors in the trust, the Contracts provide each 
Contract owner with the right to exercise his or her own judgment and 
transfer Contract values into other subaccounts. Moreover, the 
Contracts will offer Contract owners the opportunity to transfer 
amounts out of the affected subaccounts into any of the remaining 
subaccounts without cost or disadvantage. Applicants assert that the 
proposed substitutions, therefore, will not result in the type of 
costly forced redemption that Section 26(c) was designed to prevent.
    7. Applicants represent that the proposed substitutions also are 
unlike the type of substitution that Section 26(c) was designed to 
prevent in that by purchasing a Contract, Contract owners select much 
more than a particular investment company in which to invest their 
Contract values. They also select the specific type of coverage offered 
by the Company under the Contract, as well as numerous other rights and 
privileges set forth in the Contract. Contract owners may also have 
considered the size, financial condition, type and reputation for 
service of the Company, from whom they purchased their Contract in the 
first place. These factors will not change because of the proposed 
substitutions.
    8. Further, the proposed substitutions are consistent with the 
protection of investors and the purposes fairly intended by the Act for 
the following reasons:
    a. Within five days after the proposed substitutions, Applicants 
represent that the Company will send Contract owners who are affected 
by the substitutions written notice informing them that the 
substitutions have taken place, and will explain other procedures the 
Company intends to follow in connection with Contract owner transfers 
and exchanges following the substitutions.
    b. From June 1, 2004, until the date of the proposed substitutions, 
the Company will permit Contract owners to make transfers of Contract 
value out of each Replaced Portfolio subaccount to other subaccounts or 
the fixed account without those transfers counting toward the limited 
number of transfers permitted each Contract year without a transfer 
charge. Likewise, for at least 30 days following the proposed 
substitutions, the Company will permit Contract owners affected by the 
substitutions to transfer Contract value out of the Replacement 
Portfolio subaccount to other subaccounts or the fixed account without 
those transfers counting toward the limited number of transfers 
permitted each Contract year without a transfer charge.
    c. The Company will carry out the proposed substitutions by 
redeeming shares of each Replaced Portfolio held by the Accounts for 
cash and then applying the proceeds to the purchase of shares of the 
Replacement Fund. The proposed substitutions will take place at 
relative net asset value with no change in the amount of any Contract 
owner's Contract value or death benefit, or in the dollar value of his 
or her investment in any of the Accounts.
    d. Contract owners will not incur any fees or charges as a result 
of the proposed substitutions, nor will their rights or the Company's 
obligations under the Contracts be altered in any way. The Company will 
pay all applicable expenses incurred in connection with the proposed 
substitutions, including brokerage commissions and legal, accounting, 
and other fees and expenses. The proposed substitutions will not cause 
the Contract fees and charges currently being paid by existing Contract 
owners to be greater after the proposed substitutions than before the 
proposed substitutions. In addition, the proposed substitutions will 
not result in adverse tax consequences for and will not alter the tax 
benefits to Contract owners.
    e. For those who were Contract owners on the date of the proposed 
substitutions, the Company will reimburse, on the last business day of 
each fiscal period (not to exceed a fiscal quarter) during the twenty-
four months following the date of the proposed substitutions, the 
subaccount investing in the Replacement Portfolio such that the sum of 
the Replacement Portfolio's operating expenses (taking into account fee 
waivers and expense reimbursements) and subaccount expenses (asset-
based fees and charges deducted on a daily basis from subaccount assets 
and reflected in the calculation of subaccount unit values) for such 
period will not exceed, on an annualized basis, the sum of Replaced 
Portfolio B's operating expenses (taking into account fee waivers and 
expense reimbursements) and subaccount expenses for the fiscal year 
preceding the date of the proposed substitution. In addition, for 
twenty-four months following the proposed substitutions, the Company 
will not increase asset-based fees or charges for Contracts outstanding 
on the date of the proposed substitutions.

Conclusion

    Applicants request an order of the Commission pursuant to Section 
26(c) of the Act approving the substitutions. Section 26(c) in 
pertinent part, provides that the Commission shall issue an order 
approving a substitution of securities if the evidence establishes that 
it is consistent with the protection of investors and the purposes 
fairly intended by the policy and provisions of Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-2873 Filed 10-27-04; 8:45 am]
BILLING CODE 8010-01-P